UK losing out on tourism’s high spenders

LONDON – The head of a British luxury fashion house has warned that the lack of tax-free shopping for tourists visiting Britain is holding back sales and putting the country at a disadvantage to its European neighbours.

Mr Jonathan Akeroyd, chief executive of Burberry – best known for its raincoats, apparel and accessories bearing the company’s signature check pattern – said sales to tourists visiting Britain had risen by 19 per cent in London in the first three months of 2023.

Meanwhile, sales in Paris tripled, and went up by almost half in other key European cities.

Mr Akeroyd, who blamed weaker British sales figures on the absence of a tax refund scheme for tourists, said the matter “leaves the UK at a competitive disadvantage for global shoppers”.

The complaints from Burberry’s boss echo those of leaders of many other British luxury manufacturers, who are all appealing to their government to reinstate previous tax-free arrangements.

But the British Finance Ministry rejects these demands, saying that tourists will continue to visit the country even if they cannot expect tax-free sales.

International visitors to the United Kingdom used to be able to reclaim the general sales tax – or value-added tax (VAT), as it is known locally – provided that the goods they bought were above a specific value and were taken intact out of the country.

Since the various commercial companies that operated the VAT refund scheme on behalf of the British tax authorities used to levy a commission on each transaction, tourists could seldom reclaim the total sales tax paid.

Nonetheless, because VAT in Britain stands at 20 per cent for most goods apart from food, the savings available to tourists were considerable, especially on high-value luxury items.

But at the start of 2021, the British government used the country’s departure from the European Union as an opportunity to abolish the VAT refund scheme altogether, claiming that it caused £1 billion (S$1.67 billion) worth of lost revenues yearly.

It also claimed that losses could be even higher if Europeans – who were not entitled to claim tax refunds while Britain was in the EU – now used this facility.

Officials in London also claimed to have found “no evidence” that the abolition of the VAT refund scheme would reduce the number of incoming tourists.

Yet it is now becoming clear that these official estimates were deeply flawed.

A study released in early 2023 by Oxford Economics – a noted forecasting consultancy – concluded that a tax refund scheme would have netted a £340 million annual gain for the British government instead of losing revenue.

The study also estimated that with a VAT refund facility reinstated, 1.8 million extra tourists could be expected by the middle of the decade, generating £2.8 billion of additional spending and sustaining 78,000 jobs.

A recent survey conducted by Planet – a payment processing company that operates tax refunds – found that more than two-thirds of Chinese tourists visiting Europe say they would be “more likely” to visit Britain if they could claim VAT refunds on their purchases.

Each Chinese tourist spent an average of €1,537 (S$2,230) on tax-free products in Europe in March – the most recent month for which figures are available – making Chinese citizens the most significant spending visitors to the continent, according to the poll.

The evidence suggests that Britain is losing out on these customers; 55 per cent of all tax-free shopping done by Chinese tourists in Europe now takes place in France, where the tax refunds are mostly computerised and easier to process.

And even British shoppers are purchasing high-value items in Europe, where they can claim back the sales tax.

“We’ve seen a big surge in British tourists spending in mainland Europe as well, which is obviously quite telling,” said Mr Akeroyd.

Mulberry – a British company known for its luxury leather goods – closed its shop in upscale Bond Street in the heart of London in February, claiming that retail in the British capital was becoming “unviable”.

More than 90 leaders of luxury goods producers, general retailers and hospitality and tourism have signed a joint appeal to Finance Minister Jeremy Hunt, describing the abolition of the VAT refund scheme as “ill-timed” and as an “extraordinary own goal”, and demanding that it be reinstated.

“Every country remaining in the EU now offers tax-free shopping, while we don’t. Effectively, we have suddenly started charging 20 per cent more than other countries do for the same goods,” the letter argues.

Yet there is little evidence that the British government is prepared to budge.

Perhaps this is the case because the finance minister who abolished the VAT refund system in 2021 was none other than Mr Rishi Sunak, who is now Britain’s Prime Minister.

Join ST’s Telegram channel and get the latest breaking news delivered to you.